Obama Proposes Tax Breaks for Business: Too Little, Too Late?

Where were you on December 1, 2007? It’s one of those dates that you’re likely not to remember. But according to the National Bureau of Economic Research, that’s about when the recession really started. If you believe that we’re still in a recession (and most economists seem to), that makes 34 months.

We’ve had stimulus after stimulus so far and nothing has seemed to push the economy enough to turn a corner. Some boosts – like TARP – were meant to “stabilize” finances while others – like the homebuyer’s credit – were intended to be temporary fixes to short term problems. Congress, of course, has a funny definition of temporary.

While the feedback on the various programs is mixed depending on who you talk to, the consensus is that we’re still in a recessionslow downmelt down really bad way. And while that’s never a good thing, it’s especially bad in an election year. Cue Congress and the President to decide to do something about it…

Today, President Obama is expected to propose additional tax breaks for businesses in an effort to get the economy going.

The first tax break is an easy one. Specifically, the plan is expected to allow businesses to deduct the full value of new equipment purchases rather than depreciate those over time. It’s something that’s been done in various forms before so it’s likely to get the nod of approval from Congress. The idea is that allowing the deduction upfront would be an incentive to spend now. More purchases will hopefully translate into more jobs – at least that’s the thinking.

The estimated cost of the tax break is $200 billion in immediate revenue. That’s a bit misleading, though, since the total amount of deductions isn’t expected to change, just the timing.

President Obama also intends to make permanent a tax credit for research and development expenses for corporations. That’s no small feat: Congress hasn’t been amenable to that plan for about 30 years. Like with much of our Tax Code, they’ve just been adding band-aids and temporary fixes. The continuous uncertainty has been frustrating for many businesses.

Obama is also expected to tout his infrastructure proposal today. He announced the proposal on Monday in Wisconsin. The additional $50 billion investment would be used for rebuilding 150,000 miles of roads, 4,000 miles of rails and 150 miles of airport runways. It’s kind of the New Deal for our generation, I suppose.

Conspicuously missing from the Obama announcements so far? Any firm word on the expiring Bush tax cuts. Obama wants to extend the cuts only for those households making less than $250,000, though the GOP has been pushing back on that idea. Not so great for Obama? The Dems are growing restless about the idea, too.

Voters and taxpayers are growing restless. Clearly something needed to be done. The question is now: is it enough?

[T]he impact will be relatively modest. Notice that expensing merely accelerates deductions. Thus, the value to the firm depends on interest rates. With interest rates near zero, the impetus to investment is small. Put another way, this policy can be seen as giving firms a zero-interest loan if they invest in equipment. But with interest rates near zero anyway, the value of the loan is not that great.